Are we ready to wean off FDI?

TAX POLICY:The outlook for Ireland in terms of foreign direct investment is not as gloomy as we might imagine – but there are those who would suggest it's time to focus our efforts on our indigenous talent

DESPITE THE overwhelmingly negative view of Ireland on the international bond markets, and our ongoing banking and fiscal crises, our reputation with multinational investors remains remarkably high.

In fact, Ireland now ranks as the number one global destination for inward investment jobs per capita, according to IBM's Global Location TrendsReport. The report revealed that Ireland remains more attractive than other key global FDI locations, including Singapore, Hungary and the Czech Republic.

The IBM report’s findings were backed up by PricewaterhouseCooper (PwC)’s Business Leaders Snapshot Survey, which was carried out at its 2010 Business Leaders Conference earlier this month. The survey revealed that the overwhelming majority (85 per cent) of multinational representatives in Ireland intended to maintain or increase their investment in Ireland.

Over half (58 per cent) of the 800 executives surveyed affirmed their confidence in Ireland, saying they intended to maintain investment in this country at current levels. A further 27 per cent indicated they are considering additional investment.

They also expressed confidence in future business prospects, with 49 per cent expecting growth in turnover over the next 12 months and a further 28 per cent expecting turnover to remain at current levels. Just 23 per cent expected turnover to decline.

Employment, however, was a slightly different question, with nearly half (48 per cent) expecting to maintain head count at current levels, nearly a quarter (23 per cent) expect it to grow and 29 per cent expect to reduce their workforce over the coming year.

This positive view of Ireland on the part of multinational firms is very significant as foreign direct investment (FDI) continues to play a key role in Ireland’s manufacturing base. FDI accounts for €110 billion – or over 70 per cent – of total exports in the Irish economy, 240,000 jobs, 55 per cent of corporate tax, €19 billion in direct expenditure, €7 billion in payroll costs and 73 per cent of business spend on research, development and innovation.

The sentiment of the US multinational sector is also positive. “In the context of other events what’s happening on the ground at the moment is very positive,” says Joanne Richardson, chief executive of the American Chamber of Commerce in Ireland.

“In all, there are some 600 US business operations involving an investment of $165 billion and generating 100,000 jobs. Bilateral trade between the two countries is worth €27 billion. All of this is still in place, and that is a vote of confidence in itself.”

She also points to Ireland’s recent record in attracting FDI. “The IDA has made more than 70 new announcements so far this year and 70 per cent of these involved companies already here in Ireland,” she says. “Ireland is still a global location of choice for FDI and will continue winning its share of investments if we do the right things. This is very important as global FDI is projected to increase by 15 per cent this year, 25 per cent next year and 30 per cent in 2012. While the majority of this increase will go to Asia it is a big increase and even if Ireland wins just some of it that will be significant.”

But she does add a caveat. “That will only happen if we keep all of the elements in place that attract FDI at the moment and top of those is the 12.5 per cent rate of corporate tax,” she contends. “The 12.5 per cent rate of corporate tax has been the foundation stone of Ireland’s industrial policy since the mid-1990s, our most successful ever period in terms of attracting high value inward investment. And anyone who says the tax rate is not that important is mistaken, just last month Hollister cited the rate as a key factor in its decision to expand in Ballina.

“I don’t think people realise that we are competing with Singapore and Switzerland whose effective rates are zero,” she says. “If we start bringing in uncertainty around the rate now, we will do real damage to our ability to attract and retain FDI in future. And this is not just the American Chamber’s view, the OECD has stated that among the most damaging things a country can do is to increase its corporate tax rates.”

On the other hand, former Intel chairman Craig Barrett argues that Ireland should begin weaning itself off its dependence on FDI.

“Ireland needs to focus on enlarging its indigenous high-tech sector to drive economic recovery,” he said on a visit to Ireland earlier this month as chairman of the Irish Technology Leaders Group (ITLG).

“There is significant opportunity for growth driven by these firms. Ireland and the US are in similar circumstances. If we don’t take advantage of our skilled workforces and entrepreneurial spirit we will lose out to emerging economies. We [the ITLG] are in Ireland to support Irish tech companies who have the ambition to grow and succeed.”